Press Room: Tax Release

April 22, 2013

Treasury Unveils Green Book Outlining the Obama Administration’s Budget Proposals for Fiscal 2014

On April 10, 2013, the Treasury Department released its Green Book outlining the Obama Administration’s budget proposal for fiscal year 2014. The budget is largely the same as the prior year. However, there are a few new provisions. The budget proposal  provisions that will impact individuals include restoring the gift, estate and generation skipping tax rates and exemptions to 2009 levels, renewing previous proposals that limit the duration of generation skipping trusts, requiring a minimum term for grantor retained annuity trusts, and coordinating the income and estate tax consequences of grantor trusts. In addition, the proposal would tax carried interests as ordinary income and limit balances in Individual Retirement Accounts (IRAs) and other retirement vehicles to an amount sufficient to fund an annual annuity of $205,000 (about $3 million for a person retiring in 2013). Outlined below are selected new proposed tax provisions that could potentially impact businesses if enacted.

Permanent Sec. 179 Expensing & Other Small Business Tax Relief:

Permanently extend the 2013 Sec. 179 expensing and investment levels and limitations of $500,000 and the $2 million level for beginning the phase-out would be indexed for inflation for all taxable years beginning after 2013, as would the dollar limitation on the expensing of sport utility vehicles.

Mark-to-Market for Derivatives:

Require gain or loss from a derivative contract to be reported on an annual basis as if it were sold for fair market value on the last day of the taxpayer’s taxable year, and the resulting gain or loss would be treated as ordinary. The proposal would exempt from mark-to-market those transactions that qualify as a business hedging transaction.

Cost Basis:

In a proposal similar to House Ways and Means Committee Chairman David Camp’s, the administration would require the use of the average cost basis method for determining the basis of identical shares of stock that have different cost basis. Currently, taxpayers who sell identical shares of stock with differing cost basis are allowed to use the specific identification method – that is, identify the specific shares of stock that were sold.

Market Discount:

The proposal would require a taxpayer to take accrued market discount into income currently, in the same manner as original issue discount (OID).  In its explanation of the proposal, the administration argues that market discount generated by a change in interest rates or a decrease in an issuer’s creditworthiness is economically similar to OID, and, given the similarities, the tax treatment should be aligned.

Eliminate Sec. 404(k) Employee Stock Ownership Plan (ESOP) Dividend Deduction for Large C Corporations:

Corporations do not generally receive a corporate income tax deduction for dividends paid to their shareholders. However, C corporations are allowed a deduction for certain dividends paid with respect to employer stock held in an ESOP, if certain requirements are satisfied. The proposal seeks to repeal the deduction for dividends paid with respect to stock held by an ESOP that is sponsored by a C corporation with annual receipts of more than $5 million.

Omit Extension for Controlled Foreign Corporation (CFC) Look-Through and Active Financing Exception:

Currently, U.S. shareholders of a CFC can avoid a Subpart F inclusion (from interest, dividends, royalties, etc.) for payments that are made between related CFCs that don’t reduce Subpart F income of the payor which is scheduled to expire in 2013. Extension of this provision is not contained in the Administration’s budget proposal.

Remove Foreign Taxes From a Tax Pool When Earnings Associated With Those Taxes are Eliminated:

In certain instances, for example, through a redemption or a Sec. 355 distribution, E&P is reduced but tax pools remain (other than by reason of a dividend or a Sec. 381 transaction). The Administration believes taxpayers are manipulating tax pools by hyping up potential FTCs through these transactions; the proposal would require a corresponding reduction to tax pools.

Items That Continue to be Included:

The Administration continues to propose, most notably:

• Deferring deductions allocable to unremitted foreign earnings
• Subpart F income inclusion for excess returns on transactions associated with transferred intangibles
• Pooling of Sec. 902 credits for multinationals
• Limiting income-shifting through outbound IP transfers
• Legislate Rev. Rul. 91-32 by taxing a foreigner’s sale of a partnership that has US ECI
• Preventing the use of leveraged distributions as a return of capital from a related corporation that has E&P
• Extending the Sec. 338(h)(16) to certain asset acquisitions (matching 901(m))
• Limiting interest deductions paid by expatriated (inverted) entities to related persons